The government’s new provisioning rule for Taiwanese banks on property-related loans might have limited impact on lenders’ credit costs, market watchers said yesterday.
Domestic banks are required to allocate 1.5 percent of their total housing loans as provision for bad debts within the next three years, up from 1 percent currently, as a pre-emptive measure to reduce risks should the property market slow down, the Financial Supervisory Commission (FSC) said in a statement last week.
Reports in September said that the commission was considering requiring local banks to raise provisioning on property loans owing to a higher risk of property price decline. Property-related loans have increased by a compound annual growth rate of 1.4 percent since 2008, the FSC’s data showed.
“For Taiwanese banks, the new provisioning rule is affordable, while temporarily increased non-performing loans are manageable, in our view,” Nora Hou (侯乃鳳), a Taipei-based analyst at CIMB Securities Ltd, said in a research report.
Following the implementation of the new rule, Taiwanese banks’ asset quality should remain intact, with sufficient reserve and loan coverage, despite the anticipated downturn in the local property market, Hou said.
However, the new measure could have caused some minor impact on lenders’ profitability. Under the brokerage’s calculation, the new requirement would eat away about 3 to 5 percent per annum of Taiwanese banks’ pretax profit, assuming they take extra provisions of 0.3 to 0.5 percent, and average out the expense over three years.
Hou said that most large banks in Taiwan might have decided to take a one-off provisioning hit by the end of this year, given the robust year-to-date earnings momentum.
However, some banks will not set aside funds because they have managed to sustain their Tier-1 asset coverage well above 1.5 percent, she added.
Overall, analysts believe the new requirement on provisions for property-related exposure is to ensure the prudence of Taiwanese banks’ balance sheets. Moreover, it would be credit positive to the nation’s banking sector, Moody’s Investors Service said.
“The regulator’s plan is credit positive because it would improve banks’ ability to absorb losses in downturns, something that is particularly important given that Taiwanese banks’ profitability is among the lowest in Asia,” Moody’s analyst Ginger Kao (高玟君) said yesterday in a statement.
The additional reserves on residential mortgages, home renovation and construction loans will further strengthen local banks’ resistance against a sharp housing price correction and a rise in interest rates, Kao added.
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